UK Inflation rises to 2.3% in February 2017
Official data released this week reports UK inflation at 2.3% year-on-year in February 2017, compared to 1.8% in January 2017, marking the fastest rise for three and a half years and the highest inflation level since September 2013. Economists had expected inflation to reach 2.1% in February but official figures, driven principally by food, fuel and a weakened pound, pushed consumer prices even higher.
Commodity prices have been on the rise in recent months. As oil is denominated in dollars, this general upward trend has been exaggerated by the low value of sterling meaning that it has become more expensive to buy. Transport costs alone accounted for 0.8% of the 2.3% inflation level. Food prices rose 0.3% year-on-year marking an end to their thirty-one month decline.
In response, the pound rose against the dollar rising 0.9% to $1.2465.
Commentary
Interest rates and inflation are a key component of macroeconomic policy, monitored here in the UK by the Monetary Policy Committee (MPC) at the Bank of England. Interest rates are a key tool for policymakers looking to manage economic growth. If inflation is too low, markets can fall victim to stagnation and policymakers can reduce interest rates to stimulate growth. If inflation is too high, policymakers can stave of hyperinflation through increasing interest rates to constrain growth.
Low interest rates, as in the current economic environment, are a mark of expansionary monetary policy. In such environments, market participants are encouraged to spend and borrow with low savings rates and cheap debt respectively. Such a policy does have costs and can be detrimental should prices rise too fast however and so inflation is closely monitored to prevent cases of hyperinflation.
We have endured a prolonged period of low inflation and in fact policymakers have been carefully managing a deflationary environment, with the European Central Bank taking interest rates negative to actively stimulate higher inflation to avoid stagnation in markets.
Central banks aim to keep inflation around a target level and for the Bank of England, that's 2.0%. With February's inflation figure breaching that target, exceeding economic forecasts, pressure will now mount on policymakers potentially encouraging for them to enact an interest rate rise, attune to the US Federal Reserve. However, this is a delicate balancing act as minutes from the recent MPC meeting note the risk of higher unemployment levels should interest rates be increased.
The MPC next meets in May and we'll be watching closely to gauge the member's tolerance for inflation.